Shoppers are seen Friday at the Las Vegas Premium Outlets mall in downtown. The retail vacancy rate is expected to ease this year. Photo by Gary Thompson.

Investors are still pouring capital into the Las Vegas retail market even though rates of return are below levels of the past few years, the manager of a local brokerage firm said Friday.

The retail market will continue to improve throughout the year with the overall vacancy rate expected to ease to 8.1 percent by the end of the year, down 0.60 percent from the first quarter, said Chris LoBello, regional manager for Marcus & Millichap in Las Vegas.

A lot of California investors are trying to get a foothold in the market, LoBello said, competing against the larger players such as Weingarten Realty, Pan Pacific and Allied Investments who are still active in the market.

"They're more of the high net-worth investors and syndicators. Even with returns not as great, they're still willing to accept lower rates even with a strengthening economy and decreasing construction starts," he said.

Rents have climbed to a five-year high and are on pace to rise 1.8 percent to $20.40 a square foot on an annualized basis, LoBello said. Effective rents are expected to rise 2.1 percent to $18.43 a square feet as tenant concessions are tapering off

John Restrepo, principal of Restrepo Consulting Group, said vacancy rates began stabilizing in fourth quarter 2004 after increasing for eight or nine consecutive quarters.

"They were just creeping up, not massive increases, but that ended in the last quarter of '04," he said. "We're going to see a strengthening of the market, at least another quarter of stable or declining vacancy."

Retail follows residential development and nowhere is that more evident than in the northwest Las Vegas Valley, a trade area that is averaging 4 percent annual population growth, according to a midyear retail report from Marcus & Millichap.

Las Vegas-based Territory Inc. started construction earlier this year on the $40 million Centennial Gateway shopping center at U.S. Highway 95 and Ann Road. The 43,000-square-foot center will be anchored by Lane Home Furnishings, Ashley Furniture and La-Z-Boy. A second phase will have a mix of big-box tenants, small merchants and restaurants.

Retail vacancy in the northwest submarket is under 3 percent, LoBello said.

"We cannot keep inventory. A lot of single-tenant stuff goes immediately to businesses like Pearl Vision and Hollywood Video," he said.

The single-tenant lease sector is continuing to draw significant investor attention, the Marcus & Millichap report said. Buyer demand for these properties pushed the total dollar volume to $150 million for the second consecutive year in 2004.

The median price per square foot for single-tenant properties increased 6.3 percent to $272 over the past 12 months, with strong sales activity for freestanding properties, restaurants and fast food locations. Those three property types accounted for 86 percent of all single-tenant transactions.

Capitalization rates have fallen steadily over the past 24 months to 7.1 percent. Restaurants, fast food locations and drugstores lead the downward trend with cap rates below 7 percent.

"There's still tremendous tenant interest in good projects in the valley," said Matt Bear, a partner in Las Vegas-based Venture Development Group. "I think there are few opportunities to build shopping centers in the next 12 to 18 months. You can go out as far as they're building houses, but they're not quite ready for shopping centers."

Bear said land prices for retail development in Las Vegas have reached the point where tenants have to pay rents in excess of what their pro-forma allows. Establishments such as Quizno's and Pick-up Stix are paying top dollar for 1,800- to 3,000-square-foot pads that are next to the street, he said.

"They're all fighting for the same end-cap sites on out parcels. They're paying $3 to $4 a square foot (a month). Nobody blinks at that anymore. I remember when I started in the early '90s, it was $1.25 to $1.50," Bear said.

Venture Development Group built the 30,000-square-foot Eastern Crossings in Henderson, home to Panera Bread, and is nearly finished with a 26,000-square-foot center at Flamingo and Fort Apache roads.

Like other developers, Bear is doing more projects in regional markets such as Phoenix, Denver and Boise, Idaho, where monthly asking rents are in the $2 to $3 range.

Las Vegas has added about 1.8 million square feet of retail space annually over the last decade, with 41.1 million square feet of existing inventory, said Brian Gordon, principal of Applied Analysis.

Clark County taxable sales have shown double-digit growth this year, and that's coming off double-digit growth a year ago. "That cannot continue over an extended period of time," Gordon said.